Is it time to invest in Emerging Markets?

[paulhal]

Comparing the eMaxis Slim series index funds historical performance: https://imgur.com/a/Uhdd7Vf

Everything except Emerging Markets have reached unprecedented heights (largely due to US stocks but also other factors). By comparison, the Emerging Markets fund has been comparatively low since Summer 2021, coinciding with the Evergrande crisis and related decrease in trust in China.

Might this be a good time to "be greedy only when others are fearful"? Given the high economic growth projections for Emerging Markets, a case could be made for it to make a comeback relative to other indexes within the next years.

One huge caveat here is the 30% stake in China, which is facing big problems, and the fact that roughly 40% of the stake is China + Taiwan: If hypothetically China attacks Taiwan in the next few years (as was I think implied by Xi Jinping) then those markets will slump considerably. Any thoughts on the risk-return potential here?

[sutebayashi]

I think it is better to be buying here than selling.

The books that I have read and followed the advice of always suggested to have a good chunk of the portfolio in emerging markets, if aiming for good growth in returns and prepared to take risk, given the growth potential of those markets.

But they also state the importance of diversification, as the best and worst performing asset classes vary from year to year.

Indeed China’s market does suck right now, and emerging markets have thus been an under-performer of late.

But I wager (with my investments!) that there will come a time where policy change or whatever happens in the Chinese market and it produces some nice gains again. Sticking with a tsumitate approach through these troughs is what will reap benefits when the emerging markets do even just a bit better in years ahead.

That said (it is what I am actually doing), the 30 year story for emerging markets doesn’t look so compelling as it once did recently, judging by myindex.jp data.

Also, there are ex-China emerging market funds out there, which is an interesting idea, but I have not seen any data to show how that looks after stripping China out. If stripping China out doesn’t improve the risk/return characteristics of the fund, then I guess I would suck up my dislike of the CCP and stick with the China-inclusive funds.

[RetireJapan]

I am happy to own emerging markets in my all-world funds and not worry about trying to time things

[adamu]

Any thoughts on the risk-return potential here?

Already priced in.

[beanhead]

Any thoughts on the risk-return potential here?

Already priced in.

According to the theory...
https://en.wikipedia.org/wiki/Efficient ... hypothesis

[sutebayashi]

Remind me how does say the All Country index decide the allocations to each asset class?

Is it by stock market capitalization? (I guess that’s it)

Looking at it from a GDP perspective, I imagine the emerging markets probably make up a much larger share of the global economy.

(There is no maths at all behind my personal percentage, but I wonder how many different ways of thinking about it there are.)

[paulhal]

Remind me how does say the All Country index decide the allocations to each asset class?

Is it by stock market capitalization? (I guess that’s it)

Looking at it from a GDP perspective, I imagine the emerging markets probably make up a much larger share of the global economy.

(There is no maths at all behind my personal percentage, but I wonder how many different ways of thinking about it there are.)

Likely stock market capitalization is the main factor.

Given China and India collectively comprise less than 5% of the All Country index, in terms of GDP distribution, All Country is skewed toward more developed countries in favor of the GDP size. It's arguable if that matters much though - the correlation between stock market growth and GDP growth is not consistent.

Any thoughts on the risk-return potential here?

Already priced in.

Nonetheless, I think that the risk that's priced in Emerging Markets right now is over-corrected, and it will see a rise relative to other indexes in the next few years. I put ￥1M in it to test that assumption. In the future will look back on this and evaluate if this was a smart investment.